Hedge Funds Provide Worst Long-Term Gains to U.S. Pension Plans

(Bloomberg) -- Hedge funds provided lower average net annual returns to U.S. pension funds than any asset class except cash, according to a report analyzing $8.4 trillion in defined-benefit plans from 1998 through 2014.

“If cash is excluded as an asset class, then hedge funds must be considered the worst performing,” with an average compound return of about 5 percent, according to the study of retirement-plan assets by CEM Benchmarking, a Toronto-based consultant for institutional investors.

The June report arrives as some of the largest U.S. public pension funds are abandoning hedge funds or pressuring them to slash fees amid lagging returns. The hedge fund industry headed this week for its worst first-half performance since 2011, as managers lost an average 1.1 percent this year through June 29.

Pension funds from New York City to Orange County, California, are weighing exiting hedge fund investments. Vicki Fuller, chief investment officer of the New York State Common Retirement Fund, the country's third-biggest pension fund, said in June that hedge funds should face performance hurdles to earn their traditional “2 and 20” fees, or 2 percent of assets and 20 percent of gains. The California Public Employees' Retirement System, the largest U.S. pension fund, divested its $4 billion hedge fund portfolio in 2014, saying the asset class was too expensive and complex.

Of the 12 asset classes studied, publicly traded real estate investment trusts averaged 12 percent annual returns, according to the CEM Benchmarking report. Private equity returned 11.4 percent after fees, ranking second.

To contact the reporter on this story: John Gittelsohn in Los Angeles at johngitt@bloomberg.net. To contact the editors responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net, Josh Friedman, Vincent Bielski